Weak Ties

For all the excitement about India’s rise, its economic relationship with the United States remains more anemic than it could be. Why?

On the surface, all the elements are in place for an economic love affair between the United States and India. In the last decade, three American presidents -- including Obama -- have visited New Delhi with the explicit aiming of boosting bilateral trade. India's economy is growing at a very healthy 8 percent clip, and its democratic political system and rule of law -- not to mention its widespread English fluency -- should make it relatively easy for U.S. companies to sell into India and to invest there. The U.S.-India civil nuclear agreement gave hope for billions in commercial agreements between the two countries, and the recent thaw in the U.S.-Indian defense relationship (the Pentagon now conducts more military exercises with India than with any other bilateral partner), has U.S defense companies salivating. Yet the economic relationship between these two natural partners remains far below potential. Why?

The numbers tell the story. U.S. companies are investing heavily in India's economy, but not nearly at the level they are investing in China. In 2008, U.S. foreign direct investment in India was only approximately $3.5 billion (up from $0.7 billion in 2005), while U.S. investment into China was $15.8 billion (up from $1.9 billion in 2005).

The power to improve these figures is largely in Indian hands. Companies invest in Colombia, Vietnam, and other emerging markets because of those countries' explicitly pro-foreign investment policies. In contrast, companies invest in India in spite of its government, where, despite Prime Minister Manmohan Singh's admirable reforms, the legendary "license raj" -- the elaborate red tape required to set up and run businesses in India -- is still much in evidence.

India has instead relied on its inexpensive and well-educated labor force to attract foreign investment. This will not remain an asset for long. Wages are rising in some sectors at the rate of 20 percent per year. Increasingly, companies are looking at the Philippines, Sri Lanka, Vietnam, and other Asian countries as less-expensive outsourcing destinations. And despite its teeming masses, India's well-educated labor pool is actually quite small.

India could attract investment in spite of rising wages by continuing to liberalize and simplify its investment rules. The government's recent steps to permit foreign investment in multi-brand retail by mid-2011 (allowing Wal-Mart, and other foreign grocery store chains to operate in the country), could professionalize the agricultural sector and create additional employment opportunities for rural laborers. India's commitment to simplifying the tax code and labor regulations is a good start, but it must go further.

Bilateral trade is another missed opportunity. Although the United States is India's third-largest trading partner after China and the European Union, India ranks only 14th among the United States' trading partners. The U.S. share of India's market could shrink further due to free-trade deals India has just concluded with South Korea and Singapore, and is in the process of negotiating with Australia, Canada, the European Union, and Japan. For too many years, U.S. and Indian negotiators focused on resurrecting the failed Doha round of multilateral trade talks. Instead, the two countries should finally focus their efforts on the only achievable goal: completing their negotiations for a long-delayed bilateral investment treaty. This alone would significantly boost trade ties and encourage capital flows between the two countries.

Finally, the billions in contracts U.S. firms hoped to obtain as a result of the U.S.-India civil nuclear agreement now look difficult: The Indian Parliament recently passed a nuclear liability law that makes nuclear equipment suppliers potentially liable for accidents for as long as 80 years. While state-supported nuclear equipment makers in France and Russia may be willing to accept such risks, American companies are not. India is increasingly buying U.S.-made military equipment, including some C-130s, military reconnaissance planes, and anti-ship missiles, but U.S. defense companies are hoping for much larger contracts in coming years. To further this trade and a more robust defense relationship in general, the Obama administration should follow through on its pledge to reform the cumbersome U.S. export-control system, which complicates India's attempts to purchase the most advanced U.S. technology, while India should revise its onerous offset regulations and allow greater foreign investment in its defense sector.

It is of course much easier to make these suggestions from outside the government than for either the United States or India to implement them. Both countries have struggled mightily with these issues. Singh's Congress Party-led government has increased the pace of reforms since winning a new, stronger mandate from voters in 2009. Nevertheless, Singh governs an unruly democracy, where many representatives are still hesitant to embrace a closer relationship with the United States. The U.S. government has similar problems reforming decades-old "standard operating procedures," such as its export control laws, at home.

In an increasingly multipolar world, the United States will want to foster the development of new "poles" that generally share U.S. values and can help maintain a healthy balance of power in Asia. An economically strong India is very much in the American interest. Tackling these barriers to economic cooperation in an ambitious, concerted manner would do much to sustain the positive momentum in U.S.-India relations begun by the civil nuclear accord, and is well worth the effort.

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Breaking Pakistan's Nuclear Addiction

It's high time for the Obama administration to get serious about reducing nuclear tensions on the subcontinent.

With all the focus on Pakistan's struggle with terrorism, its weak and failing civilian government, and the recent devastating floods, it's easy to forget that the country remains one of the most dangerous nuclear states in the world -- one that's becoming more of a danger every day.

Following the 1971 Indo-Pakistan War and India's 1974 nuclear test, Islamabad began a concerted drive to develop nuclear weapons. By the 1980s, it was using its own resources, stolen enrichment technology, and possibly international technical assistance to build its first weapons. In response to India's 1998 test blast, Pakistan demonstrated its own capability, and the two countries' implicit nuclear rivalry became explicit.

Today, Pakistan has enough nuclear material to build 80 to 100 bombs; India has enough material for 140 bombs and is producing more. To keep pace, Pakistan's leaders insist they too must produce more fissile material -- the highly enriched uranium and plutonium used in nuclear weapons.

The continued and uncontrolled expansion of the subcontinent's nuclear arsenal raises the risk that a border skirmish between India and Pakistan could quickly turn apocalyptic. Pakistan's weapons and nuclear material stockpiles, moreover, are a prime target for terrorists, and Pakistani nuclear insiders might conceivably follow in the footsteps of A.Q. Khan to again sell their nuclear technology on the black market.

For more than a decade, Washington has called on Pakistan and India to exercise nuclear restraint. Meanwhile, the members of the 65-country Conference on Disarmament have tried and failed to start talks on a global, verifiable, nuclear-weapons material production cutoff treaty. Unfortunately, Pakistani leaders in particular have made it clear that they consider proposals for a fissile-material production cutoff a "clear and present" danger and have worked to block negotiations on a production cutoff treaty. But they can and must be persuaded otherwise, and the United States should take the lead in doing so.

Pakistan is currently the sole country blocking the start of international talks on a fissile-material production treaty. In response to this intransigence, U.N. Secretary-General Ban Ki-moon felt compelled to convene a special high-level meeting in New York this September seemingly for the sole purpose of reprimanding Islamabad. Many of the 70-plus states represented, including the United States, explicitly singled out Pakistan for abusing the consensus decision-making rules of the negotiations. "If we cannot begin these negotiations," warned Gary Samore, the White House policy czar on weapons of mass destruction, "we will need to consider other options."

Calling out Pakistan is appropriate, but to be effective Washington also needs to address the fact that Islamabad's expansion of its nuclear arsenal is motivated by its mistrust of New Delhi. India and Pakistan currently have roughly equal quantities of separated fissile material, but Pakistan worries that India will extract plutonium generated by its military reactors, which are not subject to international inspection, thereby garnering enough material, perhaps, to produce several hundred more bombs and thus pull decisively ahead in the arms race. Islamabad also knows that civil nuclear cooperation deals between India and nuclear-supplier states can free up India's domestic uranium supplies for additional plutonium production. (Pakistan has asked the United States for similar cooperation arrangements, but its requests have been and should continue to be denied.)

Stronger, more creative leadership from Washington and other capitals will be necessary to break the dangerous impasse. Here is what President Barack Obama and others can do:

Encourage Indian leadership and restraint: Pakistan's concerns about a fissile-material cutoff likely will not be alleviated as long as India's production potential remains superior. France, Russia, Britain, and the United States should use what leverage they have to encourage India to exercise greater global nonproliferation leadership and restraint.

During his upcoming India trip, Obama should quietly encourage Prime Minister Manmohan Singh to declare that his country will not increase its rate of fissile production and will put additional nonmilitary reactors under safeguards. The United States and the International Atomic Energy Agency (IAEA) could help monitor whether India sticks to such a pledge. As part of the 2005 deal to exempt India from nuclear trade standards, New Delhi pledged to support a verifiable, global fissile-material cutoff treaty, but Indian leaders have yet to do anything to that end.

Establish independent talks to establish a fissile cutoff: If Pakistan cannot be persuaded to allow talks on a fissile cutoff treaty to begin before the Conference on Disarmament in January, the United States should pursue parallel, open-ended talks involving the states with fissile production facilities that are not legally required to be under IAEA inspections -- Britain, China, France, India, Israel, Pakistan, and Russia. By engaging China and India, in particular, Pakistan would come under greater pressure to support progress.

The initial focus should be on increasing transparency around fissile production and fissile stocks, as well as on the technical work toward a system for verifying a production halt.

Talks on a verifiable, global fissile cutoff treaty might last many years. As an interim step, the five original nuclear-weapon states should seek an agreement by all states with bomb-material production plants that are not subject to safeguards to voluntarily suspend fissile production and place stocks in excess of military requirements under international inspection.

Encouraging China and Israel to participate would be the key to making the talks a success. Although both states have resisted such discussions in the past, they might be amenable this time. For Israel, which does not need more fissile material and has an aging reactor at Dimona, the moratorium would make a virtue out of necessity and improve its spotty nonproliferation record. China should support the initiative because it could lead India to slow the growth of its military fissile stockpile.

Investigate Pakistan's misuse of IAEA assistance for its weapons work: To increase its leverage on Pakistan, the Obama administration should indicate its support for an audit of the IAEA's technical-support programs in Pakistan. It has long been an open secret that these programs have likely been misused by the Pakistani government.

As a non-signatory of the Nuclear Non-Proliferation Treaty (NPT), Pakistan has been denied access to uranium on the open market. Islamabad has instead received millions of dollars of assistance from the IAEA for the purpose of finding and processing uranium ore. But this assistance for Pakistan's uranium mining has almost certainly aided its bomb production program. A 2007 U.S. Government Accountability Office investigation found that neither the IAEA nor the State Department had sufficient safeguards in place to prevent the misuse of technical cooperation for weapons purposes. (That same year, IAEA members denied technical support for Iran's heavy-water reactor at Arak because of Iran's nuclear safeguards violations and the reactor's potential role in producing plutonium.)

The fact that the IAEA's technical-cooperation programs are indirectly aiding Pakistan's bomb program is a serious offense. Article I of the NPT requires its 189 member states "not in any way to assist, encourage, or induce any non-nuclear weapon State to manufacture or otherwise acquire nuclear weapons." Washington should investigate whether any past technical cooperation was used -- directly or indirectly -- for weapons purposes by Pakistan and work to ensure that technical cooperation is not misused in the future. Moreover, Congress could exert leverage by denying the further expenditure of U.S. funds for technical cooperation to Pakistan unless and until the IAEA can ensure that such funds cannot be used for nuclear weapons-related activities.

Taken together, these policies could persuade Pakistan to drop its opposition to negotiations to halt the further production of nuclear-bomb material and help slow an expensive and dangerous arms race in a fraught neighborhood. The alternatives to a peaceful resolution are too terrible to contemplate.